Long-run Determinants of Inflation Differentials in a Monetary Union"This paper analyzes the long-run determinants of inflation differentials in a monetary union. First, we aim at establishingsome stylized facts relating the regional dispersion in headline inflation rates in the euro area as well as in the main components of the consumer price index. We find that a relatively large proportion of it occurs in the Service category of the EU's harmonized consumer price index (HICP). We then lay out a model of a monetary union with fully flexible prices, the long-run properties of which are analyzed. Our model departs in several respect from the Balassa-Samuelson hypotheses. Our results are in contrast with the result that movements in the real exchange rate are mainly driven by regionally asymmetric productivity shocks in the traded sectors. Our results point instead to relative variations in productivity in the non-traded sector as the primary cause of price and inflation differentials, with shocks to productivity in the traded sector being largely absorbed by movements in the terms of trade in the regional economies. These shocks are also found to largely drive the variability of real wages at the country level"--National Bureau of Economic Research web site. |
Common terms and phrases
Altissimo AN,t analyze Balassa Balassa-Samuelson effect Benigno consumer price country H currency area degree of dispersion denotes Dispersion in HICP Duarte and Wolman dynamic factor model economy elasticity of substitution equations euro area euro area countries European Central Bank excluding energy firm h five months moving foreign foreign-produced traded headline inflation HICP y-o-y growth HN,t home-produced traded household Industrial Good excluding inflation differentials inflation dispersion labor mobility log-linear approximation mark-up shocks markets monetary policy monetary union months moving average movements NBER NBER Working Papers non-traded goods prices non-traded sector obtain overall dispersion Palenzuela pĈi perfect labor mobility PH,t PN,t price differential price discrimination price level price of non-traded productivity shocks PT,t real exchange rate regional relative price respect Rogoff Services subindex terms of trade tradable traded and non-traded traded sector Uc(C Uc(Ct variability variance decomposition Vi(Lt y-o-y growth rate YN,t YT,t